Welcome back to Hard Money Academy. I’m Chris Jamison with SF Lending, your hard money lender for life. Today, we’re diving into Hard Money 107: how to qualify for a hard money loan. Understanding how to qualify is crucial if you’re planning to invest in real estate.
Define Your Exit Strategy
The first step in qualifying for a hard money loan is defining your exit strategy. Knowing how you’ll get out of the loan before you even take it out is essential.
Buying for Rental Property
If you plan to buy houses to hold as rental properties, you need to ensure that you can transition from a hard money loan to a conventional loan. Here are some things to consider:
- Conventional Loan: Ensure you qualify for a Fannie Mae or Freddie Mac 30-year fixed mortgage.
- Regional Banks: If using regional banks, confirm you qualify for a portfolio commercial loan before buying multiple properties.
- National Refi Programs: For national programs backed by hedge funds, be prepared for higher rates. However, many are amortized over 25-30 years, which can help maintain decent cash flow.
Buying to Flip
If your strategy is to flip properties, the process is less demanding. The key factors are:
- Cash Reserves: Have enough cash in the bank to handle the purchase, renovation, and unexpected costs.
- Holding Costs: Prepare to cover interest payments, taxes, insurance, and maintenance.
- Emergency Funds: Be ready for unexpected repairs, such as replacing a roof before selling.
Understanding the Loan Application
The hard money loan application is fairly straightforward and usually spans 1-3 pages, sometimes using a 1003 loan application common in conventional loans.
Key Sections of the Application
- Personal Information: Name, contact details, date of birth, and social security number.
- Financial Information: Assets, income, and employment details.
- Property Information: Property address, rehab size, and expected ARV (After Repair Value).
- Real Estate Experience: Experience can elevate your application priority.
- Declarations: History of bankruptcy, judgments, or foreclosures.
- Authorization & Acknowledgment: Sign off to verify the information provided.
Credit Report Evaluation
Most hard money lenders will pull a credit report to assess your creditworthiness. They look for:
- Recent Credit Activity: Ensuring you’re not overextending yourself.
- Score and Credit History: Median score, payment history, collections, and foreclosures.
- Lien Checks: State or federal liens, especially from the IRS.
Supporting Documents
Expect to provide supporting documents such as:
- Bank Statements: Proof of funds.
- Entity Information: LLC documents and EIN.
- Investment Accounts: Verifying the financial information on your application.
Pre-Qualification and Approval
In a competitive market, it’s vital to get pre-qualified and approved quickly. This helps you:
- Make Stronger Offers: Showcase your capability to sellers and real estate agents.
- Build Trust: Gain credibility with wholesalers, Realtors, vendors, contractors, and partners.
- Act Fast: Be ready to pull the trigger on deals and demonstrate your ability to perform.
The Importance of Hustle
In today’s market, hustle is essential. Being willing to act quickly on opportunities makes all the difference. Here’s what you need to do:
- Be Ready: Respond immediately to new listings or opportunities.
- Network: Connect with wholesalers, Realtors, and lenders.
- Work Hard: Be willing to inspect properties and make offers swiftly.
Summary
Qualifying for a hard money loan requires a clear strategy, financial preparedness, and the ability to act swiftly. Whether you’re buying rental properties or flipping houses, understanding the nuances of conventional loans, cash reserves, and the application process is essential. Providing accurate personal and financial information, coupled with a solid credit history, will strengthen your application.
Remember, in a competitive real estate market, hustle and networking are key. By being ready to seize opportunities and building trust with industry professionals, you can effectively secure and utilize hard money loans for your real estate investments.
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